Should You Opt for Loan Restructuring after Moratorium or Not?
The six month EMI Moratorium for individuals and businesses impacted due to COVID 19 has expired on August 31, 2020. Thus, for all those who had opted for EMI holiday from March to August 2020, EMIs or credit card bill will stand due in the month of September. However, financial disruptions caused due to pandemic have not ceased yet. A lot of self employed and salaried individuals are still facing cash flow hassles caused due to business disruptions.
To ease the financial hassles of these individuals, RBI announced a provision of Loan Restructuring for Personal Loans as well as Commercial Loans. As we saw: Loan Moratorium has a cost involved and it marginally increased EMIs, tenor, or both in many cases. Thus, borrowers are facing double sword of interest adjustment as well as shortage of liquidity in the present financial crisis.
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Let’s decode restructuring option and understand should you opt for the same or not. We will also try to look at the implications of the option of readjusting your loan EMI & tenor under restructuring.
Why RBI offered Restructuring & not the blanket Moratorium?
The RBI Governor on August 6 categorically said that after 6 months of Moratorium it is imperative to continue the repayment relief to only those who have been severely impacted by COVID 19. A blanket Moratorium is not a solution as interest on interest is also being accrued during the repayment deferment period.
Secondly to ensure that repayment relief is extended to only the ones affected by pandemic, RBI stated that the borrower’s account must be standard before March 1, 2020.
Who can opt for Restructuring of Loan?
Thus, you could opt for restructuring only if:
1. Your monthly income is disrupted due to Covid 19. Only those who have faced job loss, pay cut or loss of business income should consider recasting their loan accounts under the RBI’s restructuring scheme.
2. In order to avail of Loan Restructuring your account must be standard on March 1, 2020. Your account should not have defaulted for more than 30 days this year.
These two broad parameters apply to all loan accounts, including and not limited to Personal Loans, Home Loans, Business Loans, Education Loans, Credit Card Outstanding & more.
What will be the implications of Restructuring a Loan?
The Restructuring Scheme for stressed accounts amidst COVID 19 will help you make EMIs affordable by restructuring loan terms and extending tenor. The final guidelines will vary as per the lender.
Amid current scheme, you will get repayment relief for up to 2 years. Contact your lender for details of the same.
The restructuring relief is being offered to ease your debt repayment. Though we are currently waiting for lenders’ take on recasting loans, it is expected that interest rate & tenor will be adjusted to ensure that there is minimum burden on borrowers.
Like Moratorium, restructuring your loans will not impact the status of your account or Credit Score. However, the same will be reported to Credit Bureau, while ensuring no impact on the rating or score.
Who should not opt for restructuring?
Anyone who has a back-up to pay out regular EMIs should opt for regular repayment of loan. Rescheduling is suggested but not the restructuring, the latter should be the last resort.
Let’s elucidate this below.
A) If your Home Loan is on MCLR basis.
In past 2 years repo rate is slashed by 250 bps, where 110 bps was reduced after announcement of lockdown in March this year. Thus, those who have Home Loans linked with external benchmarks are serving lower rate of interest as compared to loans linked to MCLR. If you could manage to switch your loan to EBLR regime from MCLR, you can easily reduce your Home Loan Interest Rate by 100-150 bps and thus save sufficiently on the interest cost.
It is better to switch & save rather than opting for restructuring. Approach your lender, make bullet payment for accrued interest and reschedule your loan.
B) Basis Tenor of Home Loan
In case your Home Loan is just started, you can benefit from Balance Transfer or switching to MCLR but matured loans that are already on the last leg of repayment tenure, need not be touched for resetting terms. As there is a breakage cost attached in transferring or switching the loan. EMI holiday should be avoided at this stage.
C) Can you borrow Secured Loan?
For those who have cash crunch and finding it difficult to pay for EMIs temporarily should look for back up repayment sources such as liquidating FD or raising a Loan Against Owned Car and serve your expensive loans like Personal Loan and Credit Card outstanding on priority. There is no point in delaying repayment of high cost loans.
D) Multiple Loans? Consolidate.
Applying for a secured Debt Consolidation Loan is one of the recommended options to make your EMIs affordable & get on the path of loan redemption. The current pandemic situation is an unprecedented one and no one for sure can guide you how long it will take to ease the cash flows. Thus accumulating debt is a NO, at least for those who can pay back.
E) Curious case of Credit Cards!
As we all know: Credit Cards are one of the most expensive debt accounts. You should be careful in making the repayment. Make sure you do not hurt your credit score by missing the payment for September. After 6 months of Moratorium, the outstanding on card can be overwhelming. So tread carefully. Use following tips-
i) Do not miss the payment. Pay at least Minimum Account Due (MAD).
ii) If your overall outstanding on Card is higher than your repayment capacity, apply for Easy EMI option and reduce the rate of interest.
Alternatively avail a small secured loan such as Loan Against FD, Gold Loan or a Top Up on asset & pay out the entire debt. These secured loan options are comparatively cheaper credit and easy to repay at the same time. Loan against FD & Gold Loan offers high amount of repayment flexibility and thus will ease off financial stress of paying out each month.
iii) Freeze the card usage, until you clear the debt.
All in all, after six months of Moratorium, it may require a lot of negotiation with your lender along with some form of reshuffling of your savings & investments portfolio, but in the end it will be worth the effort to be debt free.
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